UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 1-10254
Total System Services, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-1493818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Sixth Avenue, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF May 13, 1996
- ---------------------------- ---------------------------------
Common Stock, $.10 par value 129,288,722
<PAGE>
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995.............................. 3
Consolidated Statements of Income - Quarters ended
March 31, 1996 and 1995........................ 4
Consolidated Statements of Cash Flows - Quarters
ended March 31, 1996 and 1995................... 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 7
Part II. Other Information
Item 6. (a) Exhibits................................. 12
(b) Reports on Form 8-K...................... 12
Signatures.............................................. 13
- 2 -
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Part 1 - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes
$18,380,745 and $16,742,926 on deposit with
a related party at 1996 and 1995,
respectively) $ 19,612,947 18,849,623
Accounts receivable, net of allowance for
doubtful accounts of $708,662 and $714,374
at 1996 and 1995, respectively 48,725,370 49,614,779
Prepaid expenses and other current assets 9,475,020 9,362,500
----------- -----------
Total current assets 77,813,337 77,826,902
Property and equipment, less accumulated
depreciation of $56,279,824 and $54,944,079
at 1996 and 1995, respectively 58,120,979 54,572,903
Computer software, less accumulated amortization
of $18,348,003 and $16,317,318 at 1996 and 1995,
respectively 38,709,178 39,215,561
Other assets 29,397,034 27,384,435
----------- -----------
Total assets $ 204,040,528 198,999,801
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,306,789 5,811,334
Current portion of long-term debt and
obligations under capital leases 246,300 243,786
Accrued employee benefits 4,031,228 10,412,551
Other current liabilities (includes $1,621,069
and $1,578,899 payable to related parties at
1996 and 1995, respectively) 26,214,319 21,113,104
----------- -----------
Total current liabilities 37,798,636 37,580,775
Long-term debt and obligations under capital
leases, excluding current portion 630,500 686,955
Deferred income taxes 16,742,915 16,260,050
----------- -----------
Total liabilities 55,172,051 54,527,780
Shareholders' equity:
Common stock - $.10 par value. Authorized
300,000,000 shares; issued 129,483,522 and
129,461,544 at 1996 and 1995, respectively;
129,288,722 and 129,266,744 outstanding at 1996
and 1995, respectively 12,948,352 12,946,154
Additional paid-in capital 4,901,624 4,445,755
Treasury stock, at cost (475,789) (475,789)
Cumulative currency translation adjustments (1,628,408) (1,052,081)
Retained earnings 133,122,698 128,607,982
----------- -----------
Total shareholders' equity 148,868,477 144,472,021
----------- -----------
Total liabilities and
shareholders' equity $ 204,040,528 198,999,801
=========== ===========
</TABLE>
- 3 -
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Quarters ended
March 31,
1996 1995
<S> <C> <C>
Revenues:
Bankcard data processing services (includes
$4,968,105 and $602,297 received from related
parties in 1996 and 1995, respectively) $ 62,749,742 46,466,751
Other services 8,352,237 6,913,658
----------- -----------
Total revenues 71,101,979 53,380,409
----------- -----------
Expenses:
Salaries and other personnel expense 29,093,087 22,375,038
Net occupancy and equipment expense 18,945,948 15,159,512
Other operating expenses (includes $2,430,832 and
$198,120 paid to related parties in 1996 and 1995,
respectively) 15,193,649 8,082,632
----------- -----------
Total operating expenses 63,232,684 45,617,182
----------- -----------
Operating income 7,869,295 7,763,227
Nonoperating income:
Gain on disposal of equipment, net 142,204 16,651
Interest income, net (includes $268,181 and $159,210
received from a related party in 1996 and 1995,
respectively 281,724 149,579
----------- -----------
Total nonoperating income 423,928 166,230
----------- -----------
Income before income taxes and equity in
income (loss) of joint venture 8,293,223 7,929,457
Income taxes 3,034,442 2,944,349
----------- -----------
Income before equity in income (loss) of
joint venture 5,258,781 4,985,108
Equity in income (loss) of joint venture 710,433 (201,589)
----------- -----------
Net income $ 5,969,214 4,783,519
=========== ===========
Net income per share $ .05 .04
=========== ===========
Weighted average shares outstanding 129,281,960 129,262,588
=========== ===========
Cash dividends per common share $ .011 .011
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Quarters ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,969,214 4,783,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (income) loss of joint venture (710,433) 201,589
Depreciation and amortization 5,492,362 4,679,387
Provision for doubtful accounts 25,000 (2,264)
Deferred income tax expense 482,865 (914,226)
Gain on disposal of equipment, net (142,204) (16,651)
(Increase) decrease in:
Accounts receivable 864,409 (2,343,167)
Prepaid expenses and other assets (1,765,350) (2,482,033)
Increase (decrease) in:
Accounts payable 1,495,455 1,839,084
Accrued expenses and other current liabilities (1,866,832) (2,105,963)
---------- ----------
Net cash provided by operating activities 9,844,486 3,639,275
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (6,197,985) (2,444,747)
Additions to computer software (1,612,242) (2,627,493)
Proceeds from disposal of equipment 237,257 21,525
Investment in joint venture -- (950,077)
---------- ----------
Net cash used in investing activities (7,572,970) (6,000,792)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt and
capital lease obligations (53,941) (75,918)
Dividends paid on common stock (1,454,251) (1,454,205)
---------- ----------
Net cash used in financing activities (1,508,192) (1,530,123)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 763,324 (3,891,640)
Cash and cash equivalents at beginning of period 18,849,623 14,684,674
---------- ----------
Cash and cash equivalents at end of period $ 19,612,947 10,793,034
========== ==========
Cash paid for interest $ 7,349 10,077
========== ==========
Cash paid for income taxes $ (190,382) 978,495
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements represent
the accounts of Total System Services, Inc.[service mark] (TSYS [registered
trademark]) and its wholly owned subsidiaries, Columbus Depot Equipment Company
[service mark] (CDEC [service mark]), Mailtek, Inc. [service mark] (Mailtek),
Lincoln Marketing, Inc. [service mark] (LMI) and Columbus Productions, Inc.
[service mark] (CPI). The statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all information and footnotes
necessary for fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles.
All adjustments, consisting of normal recurring accruals, which, in the opinion
of management, are necessary for a fair statement of financial position and
results of operations for the periods covered by this report have been
included. The accompanying unaudited consolidated financial statements should
be read in conjunction with the Company's consolidated financial statements and
related notes appearing in the Company's 1995 annual report previously filed on
Form 10-K.
On March 29, 1996, TSYS declared a two-for-one stock split, which was
effected on April 22, 1996, in the form of a 100% stock dividend on its $.10
par value common stock. All shareholder equity, share and per share amounts in
the accompanying consolidated financial statements have been restated to give
effect to the split. Prior to the split, TSYS' charter was amended to increase
authorized shares from 100 million to 300 million.
A significant component of other assets included on the consolidated
balance sheets at March 31, 1996, and December 31, 1995, is contract acquisi-
tion costs, net, of $18,412,418 and $17,628,448, respectively.
- 6 -
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in those
items:
Percentage of
Total Revenues Percentage
Quarters ended Change in
March 31, Dollars
----------------- ------------
1996 1995 1996 vs 1995
---- ---- ------------
Revenues:
Bankcard data processing services 88.3% 87.0% 35.0%
Other services 11.7 13.0 20.8
----- -----
Total revenues 100.0 100.0 33.2
----- -----
Expenses:
Salaries and other personnel expense 40.9 41.9 30.0
Net occupancy and equipment expense 26.6 28.4 25.0
Other operating expenses 21.4 15.1 88.0
----- -----
Total operating expenses 88.9 85.4 38.6
----- -----
Operating income 11.1 14.6 1.4
Nonoperating income 0.6 0.3 155.0
----- ------
Income before income taxes and
equity in income (loss) of joint
venture 11.7 14.9 4.6
Income taxes 4.3 5.5 3.1
----- -----
Income before equity in income
(loss) of joint venture 7.4 9.4 5.5
Equity in income (loss) of joint venture 1.0 (0.4) 452.4
----- -----
Net income 8.4% 9.0% 24.8%
===== =====
Total revenues increased $17.7 million, or 33.2%, during the first quarter
of 1996, compared to the same period in 1995.
Revenues from bankcard data processing services increased $16.3 million, or
35.0%, in the first quarter of 1996, compared to the first quarter of 1995.
Increased revenues from bankcard data processing are primarily attributable to
growth in the card portfolios of existing customers and the related increases
in the volume of authorizations and transactions, as well as growth in new
services provided to these existing customers. Another significant factor in
the growth in bankcard data processing revenues was the 3.8 million cardholder
accounts being processed for Total System Services de Mexico, S.A.
- 7 -
<PAGE>
Results of Operations (continued)
de C.V. ("TSYS de Mexico"), TSYS' Mexican joint venture; the conversion of
these accounts to THE TOTAL SYSTEM [service mark] was completed in July 1995.
Average cardholder accounts on file for the first quarter of 1996 increased
approximately 19.2 million to 64.3 million, an increase of 42.6% over the same
period in 1995. Total cardholder accounts on file at March 31, 1996, were 65.1
million, compared to 46.3 million at March 31, 1995.
At March 31, 1996, TSYS, the first processor fully certified to process
commercial cards, was processing approximately 2.2 million of these cards, a
66.1% increase over the 1.4 million cards being processed at March 31, 1995;
commercial cards are included in cardholder accounts on file discussed above.
Revenues generated by commercial cards, included in bankcard data processing
revenues, increased 83.0% during the first quarter of 1996, compared to the
same period in 1995.
Revenues derived from the processing of TSYS' merchant accounts, which
generally provide more revenue per account processed, are included in bankcard
data processing revenues. At March 31, 1996, TSYS was processing approximately
630,000 merchant accounts compared to 382,000 accounts at March 31, 1995. The
merchant accounts on file at March 31, 1996, included more than 100,000
accounts of TSYS de Mexico.
The planned joint venture between TSYS and Visa U.S.A., to be known as Vital
Processing Services L.L.C. ("Vital"), is expected to become operational in the
second quarter of 1996. Vital will merge TSYS' back-office merchant processing
and Visa's Merchant Bank Services' point-of-sale processing operations. Once
operational, the results of operations of the joint venture will be reflected
as equity in the income of the Vital joint venture. The change in classific-
ation of the Company's revenues and expenses from its merchant operations will
affect the comparability of prior periods presented in the Company's income
statement beginning with the inception of Vital.
A significant amount of the Company's revenues are derived from certain
major customers who are processed under long-term contracts. For the quarters
ended March 31, 1996 and 1995, two customers accounted for approximately 32%
and 35% of total revenues, respectively. As a result, the loss of one of the
Company's major customers could have a material adverse effect on the Company's
results of operations.
TSYS has begun the conversion of Bank of America's cardholder accounts to
its new cardholder system, TS2. Conversions to TS2 of remaining portions of
Bank of America's cardholder accounts are currently expected to continue
during the remainder of 1996, and into 1997. Management believes all of Bank
of America's cardholder accounts will be successfully converted to TS2.
- 8 -
<PAGE>
Results of Operations (continued)
Since the end of the first quarter, TSYS and Bank of America have amended
their processing agreement to, among other things, eliminate the financial
penalties and termination rights associated with prior conversion delays. The
conversion and processing of Bank of America's cardholder accounts is not
expected to have a material impact on TSYS' 1996 financial condition or results
of operations.
Revenues from other services, primarily generated by TSYS' wholly owned
subsidiaries, increased 20.8% for the three months ended March 31, 1996,
compared to the same period in 1995. The increase in revenues can be
attributed primarily to increased business from existing customers and the
acquisition of two significant new customers by one subsidiary of TSYS.
Total operating expenses increased 38.6% for the first quarter of 1996,
compared to the same period in 1995. Increases in expenses are reflected in
all categories and are attributable to the addition of personnel and equipment;
the cost of materials associated with the services provided by all companies,
particularly the supplies related to processing the increased number of
accounts on THE TOTAL SYSTEM; certain processing provisions, and expenses
associated with the conversion of customers to TS2.
Employment expenses increased 30.0% in the first quarter of 1996, compared
to the same period in 1995. The average number of employees in the first three
months of 1996 increased to 2,332, a 13.8% increase over the 2,049 in the same
period of 1995. In addition to the growth in number of employees, the increase
in employment expenses is attributable to normal salary increases and related
employee benefits. Nonemployee compensation, primarily temporary help and
contract programmers, is included in employment expenses and also contributed
to the increase. At April 30, 1996, TSYS had 2,464 full-time and 107 part-time
employees.
Net occupancy and equipment expense was up 25.0% for the first quarter of
1996 over the same period in 1995. Equipment and software rentals, the largest
component of occupancy and equipment expense, was up 30.4% in the first quarter
of 1996, compared to the first quarter of 1995. Due to the rapidly changing
technology in computer equipment, TSYS fills a substantial portion of its
equipment needs through operating leases. Upgrades were made to two IBM
processors in August 1995 and in October 1995; and, in addition, in February
1996, a new IBM processor was leased. Significant additional direct access
storage devices have been leased since the first quarter of 1995 to accommodate
increased volumes due to growth in the number of accounts being processed.
Other operating expenses increased 88.0% for the three months ended March
31, 1996, compared to the same period in 1995. Management fees totaling $2.4
million were paid to affiliated companies for various services in the first
quarter of 1996. The majority of these management fees resulted from the
formation of Synovus Administration
- 9 -
<PAGE>
Results of Operations (continued)
Services Corp. and are included in other operating expenses in the first
quarter of 1996, but were primarily reflected as salaries and other personnel
expenses in the first quarter of 1995. Other factors contributing to the
increase in other operating expenses were supplies associated with processing
the increased number of accounts and increased travel costs related to on-site
training by TSYS staff of personnel in banks being converted in Mexico, as well
as other new customers. Other operating expenses also increased as a result of
certain provisions made for contactual or negotiated processing commitments.
The processing provisions were deemed necessary in view of the increased risks
associated with the significant increase in the number of accounts being
processed.
Interest income, net, includes interest expense of $15,373 and $18,763 and
interest income of $297,097 and $168,342 for the first quarters of 1996 and
1995, respectively. The 18.1% decrease in interest expense is due to a
reduction in the amount of debt outstanding in the first quarter of 1996,
compared to the same period in 1995. Interest income increased 76.5% in the
first quarter of 1996, compared to first quarter 995. The change is the result
of both fluctuations in cash available for investment and short-term interest
rates.
TSYS'effective income tax rate for the first quarter of 1996 was 36.6%,
compared to 37.1% for the same period in 1995. The decline in TSYS' effective
tax rate for the first quarter of 1996, compared to the same period in 1995, is
primarily due to certain effective tax planning opportunities.
TSYS de Mexico, which became operational in July 1995, continues to perform
as expected. TSYS' share of earnings from the joint venture, in U.S. dollars,
for the first quarter of 1996 was approximately $710,000, compared to a
preoperating loss of $202,000 in the first quarter of 1995. TSYS' revenues,
in U.S. dollars, for the first quarter of 1996 for processing services provided
to TSYS de Mexico were approximately $4.5 million. The Mexican economy,
particularly in terms of inflation and exchange rates, has improved relative to
1995. TSYS remains confident of the operational performance of the Mexican
joint venture in 1996; however, there remains uncertainty in the Mexican
economy which management continues to monitor.
Liquidity and Capital Resources
During the first quarter of 1996, TSYS purchased property and equipment of
$6.2 million and added $1.6 million of computer software, primarily purchased
software. Dividends on common stock of $1.5 million were paid in the first
quarter of 1996.
During the first quarter of 1996, TSYS announced its decision to remain in
Columbus, Georgia, and build a new campus-type facility on 50 acres of land
north of downtown Columbus. The decision was based on a commitment by the
state of Georgia
- 10 -
<PAGE>
Liquidity and Capital Resources (continued)
to collegiate high-tech education and cooperation by the city of Columbus in
making available a suitable building site. The campus facility will
consolidate TSYS' multiple Columbus locations and will facilitate future
growth. The campus development will be a multi-year phased project with
initial construction scheduled to begin in early 1997. Financing for the
project is expected to be through the internal generation of funds and the
potential use of funds from external sources, possibly through the issuance of
industrial revenue bonds.
TSYS may seek external sources of capital in the future. The form of any
such financing will vary depending upon prevailing market and other conditions
and may include short-term or long-term borrowings from financial institutions,
or the issuance of additional equity securities and/or industrial revenue
bonds. However, there can be no assurance that funds will be available on
terms acceptable to TSYS. Management expects that TSYS will continue to be
able to fund a significant portion of its capital expenditure needs through
internally generated cash in the future. At March 31, 1996, TSYS had working
capital of $40.0 million compared to $40.2 million at December 31, 1995.
- 11 -
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
(11) - Statement re Computation of Per Share Earnings
(27) - Financial Data Schedule
b) Form 8-K filed during the quarter ended March 31, 1996
1. The report dated March 29, 1996, included the following important
event:
On March 29, 1996, Total System Services, Inc. ("Registrant")
announced a two-for-one stock split to be issued on April 22, 1996,
to shareholders of record as of April 11, 1996.
- 12 -
<PAGE>
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL SYSTEM SERVICES, INC.
Date: May 13, 1996 By: /s/ Richard W. Ussery
---------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: May 13, 1996 By: /s/ James B. Lipham
----------------------
James B. Lipham
Chief Financial Officer
- 13 -
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Statement re Computation of Per Share Earnings
The following computations set forth the calculations of primary and fully
diluted earnings per share for the quarters ended March 31, 1996 and 1995:
<CAPTION>
Quarters ended Quarters ended
March 31, 1996 March 31, 1995
-------------------- -------------------
Fully Fully
Primary Diluted Primary Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
<S> <C> <C> <C> <C>
Net income $ 5,969,214 $ 5,969,214 $ 4,783,519 $ 4,783,519
========== ========== ========== ==========
Weighted average
number of common
shares 129,281,960 129,281,960 129,262,588 129,262,588
Net increase due to
assumed issuance of
shares related to
stock options
outstanding 152,178 162,616 127,364 127,364
Increase due to
contingently issuable
shares associated
with an acquisition -- -- 38,868 38,868
----------- ----------- ----------- ----------
Adjusted weighted
average number of
common and common
equivalent shares
outstanding 129,434,138 129,444,576 129,428,820 129,428,820
=========== =========== =========== ===========
Net income per
common and common
equivalent share $ .05 $ .05 $ .04 $ .04
=========== =========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 19,612,947
<SECURITIES> 0
<RECEIVABLES> 49,434,032
<ALLOWANCES> 708,662
<INVENTORY> 0
<CURRENT-ASSETS> 77,813,337
<PP&E> 114,400,803
<DEPRECIATION> 56,279,824
<TOTAL-ASSETS> 204,040,528
<CURRENT-LIABILITIES> 37,798,636
<BONDS> 0
0
0
<COMMON> 12,948,352
<OTHER-SE> 135,920,125
<TOTAL-LIABILITY-AND-EQUITY> 204,040,528
<SALES> 71,101,979
<TOTAL-REVENUES> 71,101,979
<CGS> 0
<TOTAL-COSTS> 63,232,684
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,003,656
<INCOME-TAX> 3,034,442
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,969,214
<EPS-PRIMARY> .05 <FN>
<FN> On March 29, 1996, TSYS announced a two-for-one stock split to be issued
on Apirl 22, 1996, to shareholders of record as of April 11, 1996.
Financial data schedules have not been restated for prior periods for
this recapitalization.
<EPS-DILUTED> 0
</TABLE>
